Worse off than we thought

“Part of the problem is bad policies. We’ve forgotten what we’ve learned about economics. Our initial monetary policy in 2008, such as TARP [the Troubled Asset Relief Program], played an essential role – it was the right thing to do. But since then we’ve wandered wildly off course. The ‘quantitative easing’ by the Federal Reserve is simply stupid, leaving us with [federal] budget problems and in a terrible situation if inflation erupts.” –Bill Witte, principal of Witte Econometrics and economist for FTR Associates.

It’s not every day that an economist I respect uses the word “stupid” to describe U.S. economic policies. But that’s exactly what Bill Witte (below at right), principal of Witte Econometrics and economist for FTR Associates, did yesterday during FTR’s quarterly State of Freight webcast.

Frankly, though, he’s right: we’re in a hell of a monetary mess as a nation and things are only looking bleaker down the road. To rub even more salt in our fiscal wounds, the nominal revisions to U.S. gross domestic product (GDP) numbers now paint a far starker economic picture than anyone previously figured – both in terms of a much harsher recession followed by a far more tepid recovery.

Fortunately, FTR’s forecast for trucking contains some bright spots (if they can be called that), but that’s largely because the industry’s capacity remains extremely tight – so much so that despite downgrading its tonnage projections for the rest of 2011 and 2012, FTR thinks TL and LTL carriers alike will still be able to raise rates and make them stick.

Yet it’s the larger economic picture that’s creating cause for worry; the one that’s causing all these violent triple-digit swings in the stock market, among other unhealthy trends.

According to IHS Global Insight, revisions to the previous data by the U.S. Commerce Department points to a significantly deeper recession than anyone thought. Real GDP growth for the U.S. actually contracted in the U.S. by negative 0.3% in 2008 compared to the original estimate of zero GDP growth, then falling a steep 3.5% in 2009 instead of 2.6%.

Thus the “peak-to-trough” decline in GDP during the recession totaled up to 5.1% instead of the previously reported 4.1%, meaning the economy contracted a good 25% more than expected, noted FTR’s Witte.

Though those revisions now make the initial rebound seem bit faster, with GDP growth running just below 4% in the first and second quarters of 2010, the data also indicates the U.S. economic recovery started losing momentum over the second half of 2010, faltering to 0.4% GDP growth in the first quarter of 2011, instead of the previous estimate of 1.9%, and climbing just 1.3% in the second quarter this year.

“Our hope—as of a month ago—that third-quarter growth would bounce back above 3% no longer looks realistic, even though we should still get some help from a rebound in vehicle production,” noted Nigel Gault (at left), an analyst with IHS Global.

“We now expect that growth in the third quarter will come in much weaker than previously expected—probably less than 2% and possibly less than 1%,” he added. “A weak economy will also only make the tough decisions on the [U.S. federal] budget even more difficult and the case for fiscal austerity in the near term even weaker. The current fragile state of the economy also means that the Federal Reserve is likely to remain on hold for a very, very long time.”

Indeed, the Federal Reserve recently decided to keep interest rates at near zero percent out until 2013; a move that FTR’s Witte believes potentially exposes the U.S. to more harm than good.

“Before I retired as an academic, I taught a lot about economics,” Witte said. “It’s clear that we’ve forgotten all that we’ve learned.”

In particular, he said, most of the efforts by the federal government to stimulate economic growth “proved ineffective” in the end – including the $787 billion American Recovery and Reinvestment Act (ARRA) or “stimulus bill” passed in February 2009 and the $2.8 billion “cash for clunkers” program that followed later that year to invigorate sales of new automobiles.

“They’ve helped produced very large budget deficits that have become factors in the [economic] volatility going on now,” Witte explained. “We’re also now dealing with the collateral damage from the S&P [Standard & Poor] downgrade of U.S. debt, a developing banking crisis in Europe, and a slowdown in the Chinese economy. In particular, European banks are highly leveraged, so the hope is they will muddle through and not fall off a cliff. If they do, we could end up back in a 2008-style situation.”

While both Witte and Eric Starks (below at right), FTR’s president, quickly emphasized that a second recession for the U.S. is NOT in the offing, the concern is that more pitfalls and problems exist ahead than bright spots.

In particular, Witte pointed to the change in weight being given to FTR’s four main “probability cases” concerning the future direction of the U.S. economy.

Now, while putting together such economic prognostication “is as close to complete guesswork as you can get,” Witte said the change in overall direction of such cases is what’s revealing.

“Our first scenario is that we experience a miracle and the economy takes off; we’re only giving that a 5% to 10% chance of occurring,” he said. “The second is a relatively ‘low growth’ forecast, one well below par, of about 2% or a little higher. We give that a 40% chance of happening.”

Yet that leaves a more than 50% chance that the “bottom two scenarios” as Witte dubbed them might become reality – one where GDP growth slides to between 1% and 2% and the other where the U.S. dips back into a recession.

“That means there’s a lot more chance of a negative outcome occurring in the future from our forecast baseline – and our baseline isn’t good to begin with,” he said. “It also means significant U.S. economic growth is now a longer ways off.”

This is grim stuff, no matter how you look at it. But it’s also the reality of the road ahead, giving us fair warning to shore up where we can now in case another brutal economic storm does indeed descend upon us.